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  • Industry Spotlight

Supermarkets v Discounters: Where next for Sainsbury and Tesco share prices?

Supermarkets v Discounters: Where next for Sainsbury and Tesco share prices?

Discount grocers continue to gather pace in the UK, with sales in the festive season outperforming industry stalwarts; so where are Tesco and Sainsbury's share prices headed in 2020?

Festive shoppers stocking up Christmas supplies helped two German discount grocers, Lidl and Aldi, tuck into record sales over the festive period. For the big four grocers in the UK, Sainsbury’s and Tesco included, it was the worst holiday season since 2014.

Morrisons [MRW] took the brunt of the hit, with sales slumping 2.9% in the 22 weeks to 5 January. Asda, owned by US giant Walmart [WMT], was next on the chopping board, as data from research firm Kantar revealed a 2.2% dip. Share price performance however, wasn’t always predictable.

Tesco’s [TSCO] sales were 1.7% lower over the Christmas period, while Sainsbury’s [SBRY] sales declined by 0.7% in the 15 weeks to 4 January. The effect this had on Sainsbury’s and Morrisons’ share prices is stark, while Tesco’s share price has somewhat weathered the storm. Meanwhile, rumours that Walmart may be looking to offload Asda could further shake up the sector, and share price performance with it.


Morrisons' sales slump in the 22 weeks to 5 January


The rise of the discounters

During the festive period, Lidl reported the highest growth across the sector, as sales surged 11% over the four weeks to 29 December, according to the Retail Gazette. The publisher also noted that shoppers opted to spend £110m more at the chain compared to other supermarkets. In comparison, Aldi’s sales grew 5.9% in the four weeks to 24 December, topping £1bn for the first time.

Aldi’s and Lidl’s strong performance gave them their highest ever combined market share of 13.7%, more than treble the level in December 2009, research from Kantar revealed. Fraser McKevitt, head of retail and consumer insights at Kantar, believes this “unprecedented increase” is set to continue, even after the baubles are back in their boxes.

Looking ahead, Lidl is planning to invest £1.45bn to expand its presence across the UK. It currently has 790 stores but plans to increase that to 1000 by the end of 2023. Aldi is also looking to add an extra 300 stores by 2025, which would take its total real estate footprint to 1200 stores.


Aldi and Lidl's combined market share

Market analysts IGD forecasts the discounters to account for 40%, or £9.8bn, of the projected £24.1bn in sales growth over the next four years. The combined market share of Aldi and Lidl, the food and drink trade body says, will climb to 15.8% by 2024.


Is Sainsbury’s undervalued?

The Sainsbury’s share price opened the year at 230p but has since fallen 10.9% to 207p, as of 23 January’s close. The stock had fallen to 208p on the 22 January following the announcement that CEO Mike Coupe would leave his role after almost six years at the helm.

[N.B Insert Sainsbury’s story here: https://www.cmcmarkets.com/en-gb/opto/sainsburys-share-price-deteriorates-as-merger-investigation-escalates]

Sainsbury’s had been trading around 258p this time last year but when the Competition and Markets Authority blocked its merger hopes with Asda on 20 February it fell 18% – its largest percentage drop on a single day that year.

The supermarket was also forced to close 15 stores and dozens of Argos stores, which led to a 90% drop in half-year profits, causing its share price to slump to a low of 174p on 15 August. There is hope for the future though, which is being driven by its store revamp programme and online performance. According to AJ Bell Sainsbury’s has “reined in promotions, cut back on value products and promoted its own brand ranges” to try and right the ship.

Total online sales rose 5% in the 15 weeks to 4 January, with record order numbers from its clothing division, which was up 4.4%. Its overall sales performance was mainly dragged down by sluggish general merchandise demand that fell 3.9% for the quarter.  

In addition, Sainsbury’s is the only stock out of big four retailers to have a four-star rating from Morningstar, whose analysts believe its shares are undervalued. A recent note highlights its focus on quality, strong online presence and convenience store network, as strong value drivers. The dividend yield of above 5% is also attractive.


Morrisons keeps moving

As for Morrisons, its share price has dropped from a December close of 199.80p to reach 182.2p, as of 23 January, and is down from around 221.18p this time last year.

But the grocer still expects 2019-20 pre-tax profit to be “within the current range of analysts’ forecasts” of £400m to £431m, up from last year’s £396m, as a cost squeeze offsets weak demand.

AJ Bell also sees ongoing wholesale agreements with both McColl’s [MCLS] and Harvest Energy’s petrol stations, as well as the link-up with Amazon Prime, as potential sources of growth.

“The business is not standing still. Stores are being upgraded, underperforming locations are being recycled out of the portfolio and new sites are being added,” Russ Mould, investment director at AJ Bell, wrote in a January note. “There is also some experimentation with new formats and concepts like its Market Kitchen food-to-go offering. Time will tell if this represents more than just tinkering at the edges.”


Tesco scoops up savvy deals

Over at Tesco, whose share price has risen from 186p last January to start the year at 256p, there are also grounds for hope given that UK like-for-like sales rose 0.4% in Q3. It has been helped by lower prices and being quick to latch on to new consumer trends such as plant-based food. In spite of this however, the share price has been in decline year-to-date, dropping 5% since the start of 2020.

Hargreaves Lansdown says Tesco’s margins are hitting targets, its brand has been refreshed and “savvy deals with Booker Group [BOK] and Carrefour [CA] have created significant cost saving opportunities” helping profit grow. It also points to the possible sale of its Thai and Malay businesses as a potential boost to its cash position.

However, there are headwinds, including the departure of chief executive Dave Lewis who has played a large part in the share price’s turnaround.


Is Walmart looking to cast off Asda?

Due to the increasing competition from discounters Aldi and Lidl, “it’s increasingly apparent that Walmart is looking to offload Asda,” Nicholas Hyett, equity analyst at Hargreaves Lansdown, wrote in a January note. “A sale could breathe new life into the brand potentially sparking another price war.”

Another option mooted for Asda is a potential IPO in the next two to three years – at a valuation of around £8.5bn – Bloomberg reports. If it does float, it will form part of a new market reality for the UK’s major supermarkets.

But even without this, the reality for UK supermarkets is already shifting – it is a different retail landscape now with the growth of online. Meanwhile, consumers are preferring to pop into convenience stores to do smaller, more frequent shops especially with an economic downturn and Brexit uncertainty hitting spending.

While there is value to be had for investors, they may need to look closer than ever down those supermarket aisles to find it.

Disclaimer Past performance is not a reliable indicator of future results.

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